Future of PSM: ministry makes key recommendations

Do not allow Pakistan Steel Mills (PSM) to further bleed, close its operations from next month till privatisation and inject Rs 28.5 billion as equity immediately in one tranche. These are the key recommendations made by Ministry of Industries and Production (MoI&P) to the Economic Co-ordination Committee (ECC) of the Cabinet headed by Finance Minister Senator Ishaq Dar.

MoI&P, in its summary, a copy of which is available with this newspaper, has provided a chronology of key events that led to the destruction of the mills which includes a massive recruitment drive by former governments without any economic justification. The Cabinet Division is yet to circulate PSM”s summary on financial woes to the concerned members of the ECC. The ECC meeting is expected to be held anytime soon. The documents reveal that despite a bailout package of Rs 40.507 billion – from 2009 to 2012 – PSM suffered cumulative losses of Rs 86.272 billion as of June 30, 2013. During the same period, PSM”s total liabilities piled up to Rs 98.573 billion, resulting in a negative equity position. It is currently operating at 11 percent capacity and available working capital cannot support operations beyond September 2013.

According to these documents, PSM arrived at the present state due to unchecked corruption, inefficiency, over employment and government”s lukewarm attitude towards its revival. The unbroken series of losses started from 2008-09 when PSM suffered a Rs 26.45 billion operating loss. According to a report submitted before the Supreme Court of Pakistan, a Rs 7.8 billion loss was because of corruption, Rs 11.84 billion due to mismanagement, while the rest was a genuine business loss. Despite a minus 32 percent contribution margin that year, the management kept production at 65 percent while steel industry around the world cut down or stopped production to minimise losses. To top it off, 4,800 daily wages workers were permanently absorbed in 2010, adding a financial burden of Rs 2 billion for the first year and recurring expenditure of Rs 1 billion per annum.

The government did not make any serious effort to save PSM. Over hyped bailout packages were mere commercial loans at exorbitant rates and they were issued in such small tranches and at intervals so irregular that accumulating losses and accruing liabilities outpaced them. “If requested capital were provided even in first bailout package, PSM would have come out of this crisis,” the documents added. The current financial situation has turned a national asset into a national liability.

Three following options have been suggested to remedy the situation: (i) Liquidation- work on this option can start immediately by appointment of a liquidator. While there are likely political and human fallouts of this option, it will nonetheless save the government from all future liabilities. Liquidation will cost Rs 39.855 billion to the government;(ii) let it bleed- if the government keeps the mills barely alive by following the status quo, it will cost Rs 57.25 billion in 15 months; and ( iii) privatisation – this is the most talked of option. While the process can be initiated immediately, it will take about 15-18 months to complete. During this interlude, there are two sub-options available namely (a) closure of operation till privatisation- this option entails a potential cost of Rs 56.555 billion; and (b) turn it around- this option suggests that while the privatisation process is underway, a serious effort be made to turn the company around through injection of equity and partial repayment of financial costs. This option will cost the government Rs 28.49 billion and will lead to a marked improvement in PSM”s financial statement. Privatisation process under this scenario will fetch a better price for PSM than all other options.

According to the Ministry of Industries and Production, three other facts need to be made clear: (i) if funds are not provided immediately, the mills will close by end September 2013. After that, the government will need to close the operations; (ii) the days of further borrowing are gone, with gearing ratio of minus 12.34, it is inconceivable to think of further borrowing. National Bank of Pakistan (NBP) has already refused to provide any further loan to PSM; and (iii) while there appears to be no option other than privatisation, the fate of privatisation outcome will be determined by the decisions taken during the interlude till an actual bid is received and finalised. For this, the closure of operations till privatisation will be the cheapest in the current scenario.